Open Credit Enablement Network: Design and Guiding Principles
There are roughly 64 million MSMEs (Micro, Small and Medium Enterprises), i.e. small businesses, in India. These include a wide variety of businesses across professions and industries: like your street-side sugarcane juice and chaat vendors, mobile and kirana shop owners, most retail and wholesale traders, all the way to small and medium scale factory operators.
These businesses have always received the short end of the stick in terms of access to credit. This fact was corroborated by the RBI UK Sinha MSME committee report released in June 2019, which identified a staggering credit gap in the MSME sector of ₹20–25 Trillion.
“Like in many other markets, in India, most large corporations operate with MSMEs only on a credit basis. When the buyer does not honour the invoices on time, MSMEs face a financial crunch in their business. Their interest burden increases, cash flow becomes stressed and business continuity is impacted.” — U.K. Sinha MSME Committee report, 2019
The report notes that offline and online marketplaces and business networks regularly engage with MSME customers that require credit, while banks have capital to lend but are unable to do so effectively because of prohibitive acquisition and underwriting costs. In order to solve this, the report recommends the creation of a new type of lightly-regulated entity called Loan Service Provider (the marketplaces and platforms) that will act as an agent of the borrower and facilitate access to loans.
It is to this end that the Open Credit Enablement Network, i.e. OCEN (pronounced O-ken), was conceived. To solve the problems of the large and diverse MSME sector at scale, the system is designed with several principles in mind, which I introduce below.
But first let’s take a quick step back, and tell you about a related problem that , a series of digital public platforms which now include OCEN, has been solving for. At its core, it is the story of Rajni — a real street vendor that takes a loan in the morning, buys her supplies, converts them into sales at a small profit, and retires the loan at night. She is able to get this loan from informal moneylenders even today, but at an interest rate of roughly 3–5% a week, which annualises to about 150–300%! The digital public infrastructure necessary to improve her situation has been in the works since 2013, and now, 8 years on — the pieces are finally in place to attempt a solution.
This solution, OCEN, is a protocol for allowing platforms and marketplaces called LSPs (Loan Service Providers), to connect with banks and non-banking lenders to digitize the process of originating, underwriting and servicing a loan.
What is a protocol? In simple terms, a protocol is a system of rules that allow two parties to exchange information. As an example, the HTTPS protocol allows your browser to reliably and securely exchange this webpage with the server hosting it. In a similar manner, OCEN specifies a common language that LSPs and lenders can use to interpret and exchange data related to loan applications and loans.
The OCEN protocol has been designed with 7 key guiding principles, abbreviated MODEALS. These are:
Minimalism — While the protocol allows for a wide variety of loan products, the application process and objects are standardized and specify only the pieces common to all loans — e.g. the borrower, the lender and the terms.
Openness — The protocol is designed as open APIs to facilitate inclusion and interoperability. This will preclude the need for proprietary and bilateral connections between LSPs and capital providers that do not scale and bottleneck innovation and access. With open APIs, an LSP that implements the API specifications once will have access to all lenders that have themselves implemented the OCEN protocol, and vice versa.
Diversity — The MSME ecosystem is “exceedingly heterogeneous” in terms of size, products and services offered and levels of technological adoption; this entails that these businesses need very different kinds of financial products to enable them to thrive. To this end OCEN is designed to be extensible, and will allow ecosystem players to work together to innovate and cater to the specific needs of this crucial sector.
“Uniformity in and simplification of various loan application formats and assessment processes in line with learnings from supply chain financing, escrowing of cash flows is needed for quicker decision making and reducing turnaround time. Further, there is a need to develop new MSME products as per prevailing market dynamics.” — U.K. Sinha MSME Committee report, 2019
Embeddability- The loan application process enabled by OCEN is designed to be embeddable within digital marketplaces, platforms and more generally, digital user journeys. This will allow borrowers to avail a native digital lending experience within the context of companies and brands they already trust.
( Technology) Agnosticism — In specifying the protocol layer, we facilitate flexibility and interoperability between the specific technology implementations and credit products. This will allow new sets of market players to emerge and offer differentiated services to participants on both sides of the network.
Layered Innovation — The OCEN protocol builds upon the three foundational layers of the India Stack, which are Aadhaar (for Identity), UPI (for Payments) and Account Aggregator (for Data Empowerment). OCEN is itself modelled as another layer (for Credit) that others can build financial and non-financial technology products on top of.
Further, Sahay — a set of applications that form the first LSPs built on top of OCEN while also serving as reference implementations for the ecosystem — are being rolled out in Q1 2021.
Security — The OCEN protocol will enforce strong authentication and encryption requirements in order to protect loan lifecycle data.
That concludes the seven guiding principles — Minimalism, Openness, Diversity, Embeddability, Technology Agnosticism, Layered Innovation and Security — MODEALS in short.
That’s it for now — watch this space for more thoughts and updates on the Open Credit Enablement Network!
“Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.” — Adam Smith